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Can Rumors and Other Uninformative Messages Cause Illiquidity ?

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  • Radu, Vranceanu

    ()
    (ESSEC Business School)

  • Besancenot, Damien

    ()
    (Centre d'Economie de l'Université Paris Nord (CEPN))

  • Dubart, Delphine

    ()
    (ESSEC Business School)

Abstract

This paper analyzes whether false information, rumors and other uninformative messages can cause illiquidity. In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision, investors receive an uninformative but emotion loaded message. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game. We solve the model for the critical message separating the success / fail states of the project. It turns out that lesser investors will participate to the collective project when they receive a negative message as compared to the case when they receive a positive message. Predictions of the theoretical model are corroborated by data provided by an Online and a Lab experiment. Insights apply to contagion and market manipulation episodes.

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Bibliographic Info

Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number WP1309.

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Length: 23 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:ebg:essewp:dr-13009

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Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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Web page: http://www.essec.edu/
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Related research

Keywords: Experiments; Global Games; Illiquidity; Market Panic; Rumors; Strategic Uncertainty;

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